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PulteGroup (PHM) Up 39.6% Since Last Earnings Report: Can It Continue?

A month has gone by since the last earnings report for PulteGroup (PHM). Shares have added about 39.6% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is PulteGroup due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

PulteGroup (PHM) Q1 Earnings Beat Estimates, Revenues Miss

PulteGroup Inc. reported first-quarter 2020 results, wherein earnings surpassed the Zacks Consensus Estimate but revenues lagged the same. Higher demand owing to favorable housing dynamics in most part of the quarter, backed by lower interest rates and improved affordability, had a positive impact on PulteGroup’s performance.

Inside the Headlines

Earnings per share came in at 74 cents, beating the consensus mark of 70 cents by 5.7%. The bottom line also grew 25.4% year over year.

Total revenues of $2.29 billion lagged the consensus mark of $2.33 billion by 1.6% but increased 14.9% from the year-ago figure of $1.99 billion.

Segment Discussion

PulteGroup primarily operates through two business segments — Homebuilding and Financial Services.

Revenues from the Homebuilding segment were up 14.7% year over year to $2.24 billion.

Home sale revenues of $2.22 billion also improved 13.9% year over year, given higher deliveries. Also, land sale revenues grew 536% to $18.9 million from $2.9 million a year ago.

The number of homes closed increased 16% year over year to 5,373. Home closings grew across most of the operating regions served (barring Midwest). Average selling price of homes delivered was $413,000, down 2% year over year due to changes in the product and geographic mix of homes closed in the quarter.

Importantly, the company’s backlog — which represents orders yet to be closed — was 12,629, up 19.7% year over year. In addition, potential housing revenues from backlog increased 20.8% from the prior-year quarter to $5.58 billion.

New home orders also increased 16% year over year to 7,495 units in the quarter. Home orders were up across all operating regions served (except Midwest), given increased community count and higher absorption pace. Value of new orders also grew 19% from a year ago to $3.3 billion.

Margins

Home sales gross margin was up 30 basis points (bps) year over year to 23.7% in the quarter. Furthermore, adjusted operating margin also expanded 130 bps to 11.8%.

Homebuilding SG&A expenses — as a percentage of home sale revenues — were 11.9%, down 110 bps from the prior-year quarter.

Revenues from the Financial Services segment improved 24.4% year over year to $54.6 million. The segment generated pre-tax income of $20 million, up from $12 million a year ago. Mortgage capture rate in the quarter was 87%, reflecting an increase from 80% in the year-ago period.

Financials

As of Mar 31, 2020, cash and cash equivalents were $1.82 billion, up from $1.22 billion at the end of 2019. During the quarter, it repurchased 2.8 million common shares for $96 million, or an average price of $33.86 per share. However, given economic uncertainties, it has opted to suspend all stock repurchase activities.

2020 Guidance Revoked

Given the uncertainties arising from the coronavirus outbreak, PulteGroup revoked its guidance for 2020. The company also intends to suspend providing guidance for the foreseeable future.

It experienced material slowdown in consumer traffic and sales activity beginning in mid-March, as the state and local government authorities implemented various restrictions and stay-in-place orders to restrict the virus spread.

Nonetheless, the company acknowledged the fact the U.S. housing industry started 2020 on a solid note and the momentum continued until the devastating effects of the COVID-19 pandemic began impacting the country.

How Have Estimates Been Moving Since Then?

It turns out, estimates review have trended downward during the past month. The consensus estimate has shifted -11.84% due to these changes.

VGM Scores

Currently, PulteGroup has a strong Growth Score of A, though it is lagging a bit on the Momentum Score front with a B. Charting a somewhat similar path, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. It's no surprise PulteGroup has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.

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